By Mark Arbeter
The market wrapped up a dismal first quarter with the S&P 500 and the Nasdaq posting double digit losses. From a very short-term perspective, however, there were some positive signs on Friday.
The Nasdaq held right at the lows posted last Thursday, and then rallied. The S&P 500 and DJIA held well above their mini-capitulation lows set last Thursday. The Nasdaq is building short-term support just below the 1800 level, within a wider zone of support we have mentioned between 1875 and 1775. The recent low on the S&P 500 was 1081, also within a good area of support between 1133 and 1074.
However, the intermediate-term trend for the major indexes is still firmly negative. Both the Nasdaq and the "500" are in well-defined downward channels that have existed since early February and they are also trading in bearish channels that have been running since early September 2000.
The indexes have been moving lower in a fairly consistent slope or angle. The indexes move to new lows, get oversold, rally for a couple days to work off the oversold condition, and then move lower again. There continues to be heavy selling or distribution on any rally, and the old mantra of "buy the dip" has turned into "sell the rallies."
The potential lows for this bear market have not changed and they are for sub-1000 (960) for the S&P 500 and sub-1500 (1419) for the Nasdaq. At these levels, the indexes will have retraced their entire bull market moves since October 1998.
These potential targets are certainly not written in stone, but as of yet, the indexes have not traced out formations usually seen at major market bottoms. The most common formation at a major low is the double bottom. This formation is usually spread out over a month or two. Many times, the S&P 500 will not break to a new low on the second pass while the Nasdaq will usually exceed the first low by a small percentage of about 5%. The completion of this formation occurs when the index rallies above the level posted on the first move higher. The second advance should exhibit heavy volume or the power of any subsequent move higher would come into question.
Sentiment towards the market took another step in the right direction as more bulls have moved over to the bearish camp. The Consensus Poll, which measures stock and futures advisors, fell to 13% bulls, the lowest level since April 1994. The market then rallied only to roll over and put in its final low in Dec. 1994. Investors Intelligence, a poll of over 130 investment newsletters, saw bearish sentiment rise to 38%, the highest since November 1999. Bullish sentiment in this poll remains stubbornly high at 49%. At major bottoms, this poll usually goes to at least a 40%/40% split. The AAII poll of individual investors posted an increase in bears to 47%, a fairly high level of pessimism historically.
While sentiment is certainly moving into the fear zone, more is probably needed until a bottom is in. The key will be strong price action and a good bottoming formation. The market is certainly not there yet.
Arbeter is Chief Technical Analyst for Standard & Poor's